This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

If you’re not getting a service, you shouldn’t pay for it. So it makes sense that discount brokers should be paid less than full-service brokers.

However, this is not what most mutual fund companies do when they pay those who sell their products. Brokers and dealers of all kinds receive trailer fees from fund companies, at a fixed percentage for each purchase option.

Also known as service commissions, trailer fees are paid to salespeople for as long as investors remain in the fund. Investors bear the cost of these commissions, since they’re paid out of the management fees charged to the fund.

Among the few fund companies that have taken action to cut back on what they pay discounters are two long-time stalwarts of advice-giving distribution channels: Mackenzie Investments and Invesco Canada. A third series D provider is BlackRock Canada, which recently branched out into mutual funds and is Canada’s biggest provider of exchange-traded funds.

These three companies are the newest, though not the first, to create series D funds. The letter D denotes discounted funds that are designed for distribution through discount brokerages.

Well established series D providers include bank-owned RBC Global Asset Management, which offers funds under the RBC and PH&N brand names, and the investment counselling firm Beutel Goodman & Co.

Series D trailer fees are much lower than those paid by conventional retail funds that make payments to commissioned salespeople. The going rate for series D is 0.25 per cent a year. Since the trailer fees are much lower than the norm, so is the management fee, leaving investors further ahead.

By comparison, fund companies normally pay one per cent a year — four times as much as series D — to brokers who sell equity funds on a front-end-load basis. Dealers now commonly don’t charge a point-of-sale commission, so the trailer fees are the only revenue they earn on fund sales.

Let’s say you’re holding $100,000 worth of equity funds that pay trailer fees to your brokerage of 1 per cent a year. A full-service brokerage, which shares the fee with an individual broker who provides advice on asset allocation and financial planning, will collect $1,000 in revenue per year. So will a discount brokerage that only takes orders and provides no advice. But for series D, the discounters’ payout would be slashed to $250.

Consumer advocates, such as FAIR Canada, the Small Investor Protection Association and the Ontario Securities Commission’s investor advisory panel, have called on Canadian regulators to ban trailer fees and other forms of embedded dealer compensation altogether.

They note that commissions paid by fund companies put salespeople in a conflict of interest. They also point to the over-charging of self-directed investors and the disconnect between fees paid and services rendered.

The regulators are watching to see how market forces play out. If only a handful of fund companies introduce series D, the case for an outright ban on trailer fees or other regulatory changes becomes stronger. A ban on trailer fees is already in effect in Britain and Australia.

It’s unclear how many more fund companies will introduce series D. Some companies appear firmly opposed, while others are waiting to see if there will be much of a backlash by full-service salespeople who feel threatened by any price concessions made to do-it-yourselfers.

In introducing series D, Invesco Canada president Peter Intraligi and Mackenzie president and CEO Jeff Carney say they want to preserve choice as to how investors pay for advice, while providing fair treatment for self-directed investors.

It would be hypocritical, the executives say, to advocate choice as to how fund investors can pay their advisors, while refusing to accommodate those who don’t want advice. As Carney told me: “Ultimately, it’s the right thing to do, so we should do it.”

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com